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Investor interest in hedge-fund strategies has never been higher—but it's the mutual-fund industry that seems to be benefiting.

Financial advisors and institutions are increasingly turning to alternative strategies to manage portfolio risk, though the flood of money into that area tapered off a bit last year, according to an about-to-be-released survey of financial advisors and institutional managers conducted by Morningstar and Barron's. Many of them are finding the best vehicle for those strategies to be mutual funds.

The Morningstar and Barron's Alternative Investment Survey of U.S. Institutions and Financial Advisors aims to capture trends in alternative investing. (You can find the entire survey on Morningstar's Website.) Judging by this year's responses, advisers are increasingly using mutual funds to get at alternative strategies and asset classes.

Despite the H-word in the hedge-fund name, investors often view these vehicles as a way to deliver additional, or even outsize, returns over conventional investment strategies. But given the whacking most people's portfolios took in the wake of the financial crisis (not to mention a 10-year stretch of zero return for the Standard & Poor's 500), investors are increasingly interested in anything not correlated with the stock and bond markets. At the same time, they're increasingly wary of the higher fees, lack of transparency, and "lockup" periods that come with most direct investments in hedge funds.

"In this survey, people over and over talked about diversification, and looking for noncorrelated investments," says Scott Burns, director of alternative research at Morningstar. "Six years ago, when we first started this survey, it was all about alpha; advisors and institutions were looking for bigger returns."

David Klein of RBC Wealth Management in Vernon Hills, Ill., agrees. He uses technical analysis to run more than $100 million in assets, including as much as a 15% allocation to absolute-return funds. "The bottom-line question is, how do you manage risk," he told Barron's in a follow-up interview to the survey. "When clients ask, 'How much money can you make for me?' I tell them that's the wrong question," he says.

He's not alone. Burned by the financial crisis and the performance of hedge funds, investors are looking for alternatives to the alternatives. Says Burns: "2008 and 2009 were huge lessons in the price of illiquidity. Before then, a 25% allocation to hedge funds for high-net-worth clients seemed OK. But even if 75% of the portfolio was liquid, their homes weren't, their businesses weren't. When the gates went up, they saw how important liquidity was."

As a result, the hedge funds in Morningstar's database have seen $53.6 billion in outflows amid a sharp drop in assets, from $557 billion at their peak in June 2008 to $320 billion at the end of March 2012. Meanwhile, alternative mutual funds saw $87.6 billion in inflows in that same period, bringing total assets in that category to $125.7 billion.

FLOWS CAN BE HARD TO PINPOINT, though, and not all of the money poured into alternative mutual funds came from hedge-fund redemptions—surely a portion of the nearly $85 billion yanked out of stock funds last year went into alternatives. Advisors cited cost, transparency, and liquidity as the chief appeal of the mutual-fund structure for a hedge-fund strategy. And there is no shortage of options.

"There are a plethora of opportunities that didn't exist five years ago," says Thomas Meyer, CEO of Meyer Capital Group in Marlton, N.J. His firm, which manages $600 million, has 25% to 30% of client assets in alternative asset classes, like currencies and commodities, and alternative strategies, such as long/short.

Access is another key factor, Meyer says. Once a month he invites managers into the office or onto a conference call to keep up with their thinking and their strategy, and to better understand their funds. "There are a lot of land mines out there," Meyer says. "They're very accessible, and it's vitally important to know who the manager is."

Another, perhaps more obvious reason advisors are embracing mutual funds with alternative strategies: Hedge funds remain impractical for all but the extremely wealthy, says John Christianson, CEO of Highland Private Wealth Management in Bellevue, Wash. His firm manages $350 million, almost a quarter of which is invested in hedge funds and, as he calls them, "hedge funds in a mutual-fund format." Many of his clients fall into the high-net-worth camp. "But if you have $5 million or even $25 million net worth, a hedge fund with a $1 million minimum can create problems with your asset-allocation strategy," Christianson says. Plus, hedge funds can be more of a hassle for the advisor. "There's a higher bar for due diligence, more administrative work around tax forms and legal documents, additional client engagement, and if you decide you don't like the manager, unwinding all that is really tough. If we can accomplish what we want by putting $250,000 or half a million into a mutual fund with the same strategy, it's a pretty easy decision to make."

Out of stock

Equity funds saw increasing four-week-average outflows of $1.4 billion through Wednesday, according to Lipper. Average muni inflows stayed at $847 million, while equity and money funds saw average outflows of $1.4 billion and $3.4 billion.